Your Congressman: A Better Investor Than You?

NEW YORK (MainStreet) — When it comes to investing, those in Congress seem to have the golden touch.

The stock portfolios of members of the House of Representatives outperformed the market by about 6% each year between 1985 and 2001, according to a new report published in the Berkeley Electronic Press, raising questions about whether these legislators knew something the rest of us didn’t.

“We find strong evidence that Members of the House have some type of non-public information which they use for personal gain,” the researchers conclude.

While they cannot definitely prove how or why this may be the case, the operating assumption of the researchers is that some Congressmen may be privy to inside information from the industries and companies they oversee.

Indeed, the researchers note that the potential for this may be even greater in the Senate as there are far fewer legislators who each may wield greater influence. To bolster their argument, the researchers point to a study they had previously published in 2004 analyzing the investments of U.S. senators between 1993 and 1998 that found that the senators’ portfolios beat the market by 10% each year.

In their analysis, researchers compiled a list of 16,000 stocks purchased by 300 representatives based on publicly available data from congressional financial disclosures, and compared this to the stock market’s overall performance during this 16-year period.

There was no statistically significant difference between the success of portfolios held by Democrats versus Republicans, but of all the House members, the study did find that representatives with less seniority tend to have the best-performing portfolios. At first blush, this runs counter to the assumption that legislators with the most seniority and influence are those who would have the most privileged information, but as the researchers point out, this could be attributed to the fact that newer members of Congress generally have less money in reserve and may be more “highly motivated” to take advantage of whatever privileged information comes across their desks.

Going forward, the researchers argue that Congress should push to study whether there is any correlation between the stocks representatives invest in and the companies they regulate to determine if there is potential for misconduct. If so, it may be appropriate to place regulations on their investments much in the same way one might regulate the investments of any corporate insider.

“Reporting requirements similar to those imposed on corporate insiders could be appropriate for helping voters evaluate the behavior of their Representatives in terms of the pursuit of personal profit versus obligations to public interest,” the researchers write.

If nothing else, next time you write a letter to your congressman, you may want to ask him for stock advice as well.